he following Table refers to four buyers’ willingness to pay for papadums. Each buyer is willing to buy at most one papadum and no more. Buyer Willingness to Pay Linc $17.00 Jeff $15.00 Frankie $9.00 Wash $3.00 a. Let the competitive market price be $4.00: calculate the total consumer surplus in the market at this price. b. Assume now that there is only a single seller of papadums, and she knows each buyer’s willingness to pay. Assume that this seller incurs a cost of $4.00 per unit of papadum produced (i.e., the marginal cost is constant). If she intends to maximise profits, how many papadums would this seller supply to the market, and what price would she charge? Remember, the price has to be the same for each unit sold. Hint: start at a price of $17 and calculate what profit would be. Then lower the price just enough to attract an additional buyer and calculate what the new profit would be. Repeat this until all four buyers are purchasing the good and then check which price yields the highest profit. Alternatively, you can calculate the marginal revenue from lowering the price to attract an additional buyer and compare it to marginal cost. c. Calculate the producer surplus and consumer surplus at the monopoly price and production level from (b). Are consumers better off or worse off in the monopoly situation relative to the competitive market? Why?
The following Table refers to four buyers’
|
Buyer |
Willingness to Pay |
|
Linc |
$17.00 |
|
Jeff |
$15.00 |
|
Frankie |
$9.00 |
|
Wash |
$3.00 |
a. Let the competitive market price be $4.00: calculate the total
b. Assume now that there is only a single seller of papadums, and she knows each buyer’s willingness to pay. Assume that this seller incurs a cost of $4.00 per unit of papadum produced (i.e., the marginal cost is constant). If she intends to maximise profits, how many papadums would this seller supply to the market, and what price would she charge? Remember, the price has to be the same for each unit sold.
Hint: start at a price of $17 and calculate what profit would be. Then lower the price just enough to attract an additional buyer and calculate what the new profit would be. Repeat this until all four buyers are purchasing the good and then check which price yields the highest profit. Alternatively, you can calculate the marginal revenue from lowering the price to attract an additional buyer and compare it to marginal cost.
c. Calculate the
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